Earlier today, as part of our JPM earnings recap [4]we observed that "VaR plunged from $106 to $62" and wondered if it was just just "another excel copy/paste error [5]" which as we reported previously, is what JPM's internal audit attributed much of the confusion surrounding JPM's VaR calculation around the time the London Whale blow up nearly doubled the firm's VaR. Because it is always better to blame a clueless intern for botching Excel than to put the blame where it rightfully belongs. It turns out that as frequently happens, there was a dose of financial surreality behind the humor. As Bloomberg reports, the reason for the nearly 50% collapse in the company's reported maximum value at risk was because of, drumroll, yet another change in the model. 'JPMorgan said today it employed a new formula to judge the risk of its credit derivatives position, at least the fourth such model it’s used since January 2012. The portfolio was built by Bruno Iksil, known as the London Whale because his bets were so big they moved markets."
From BBG [6]:
The bank changed its measurement of value at risk, or VaR, for the credit derivatives book in the first quarter of this year “to achieve consistency with like products” within the corporate and investment bank, JPMorgan said today in a supplement. “This change had an insignificant impact” to average VaR for fixed income and the investment bank’s trading and credit portfolio, the New York-based bank said.
JPMorgan had previously changed the VaR model, which estimates the most amount of money a trading position can lose on 95 percent of the trading days, when the corporate and investment bank took over most of the credit book from the chief investment office last year. That change last year reduced JPMorgan’s estimated risk by 24 percent to $115 million in the third quarter.
JPMorgan’s switch of risk models in January of last year may have helped fuel the trading loss at the chief investment office, Chief Executive Officer Jamie Dimon told the Senate Banking Committee in June. Dimon said last May that the bank had reviewed the effectiveness of that VaR model, deemed it “inadequate” and decided to return to the previous version. Restoring the use of the earlier model meant the risk was twice what the bank had reported in April of 2012.
We can't wait for the event that will force the fifth consecutive change in the firm's VaR, this time doubling it, with or without yet another taxpayer funded bailout. We would be, however, more at peace if it wasn't JPM's customer deposits that were funding its risky operations, which apparently are so complicated that JPM itself has needed at least 4 attempts at getting its risk exposure right in the past year and so far still failing.